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Exploration and Exploitation

Discovering new possibilities, conducting research, varying product lines, risk taking, innovation all fall under the realm of exploration. On the other hand, exploitation involves the refinement of current procedures: efficiency, production, execution, and so forth. Defining these terms precisely is not easy, but there is only one major difference between them that we need to focus on. Exploration is a long-term process, with a risky, uncertain outcome. Exploitation by contrast is short-term, with immediate, relatively certain benefits. Organizations face the problem of allocating resources between exploration and exploitation. In this tutorial, we detail a model of organizational learning. We attempt to demonstrate that organizations make both explicit and implicit choices that determine the amount of exploration and exploitation that they engage in. We will show that selecting a strategy is a problem of selecting returns that vary in risk and time.

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